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UltraTech Cement: Surging power and fuel cost a concern; valuations expensive

LiveMint logoLiveMint 19-07-2017 Harsha Jethmalani

The UltraTech Cement Ltd stock saw a sharp swing from green to red on Tuesday.

Ahead of its June quarter earnings announcement, the share hit a two-month high of Rs4,451 in intraday trading on BSE. However, it ended the day’s session down nearly 1% at Rs4,315, dragged down by profit-booking.

This was despite the pan-India cement maker beating analysts’ estimates both on the profit and revenue fronts. Consolidated net profit increased 15% year-on-year to Rs897.91 crore and revenue jumped 6% year-on-year to Rs7,928.50 crore. Profit growth was partly aided by lower finance cost and other income.

What didn’t go well with the Street was the jump in input costs. Power and fuel cost surged more than 30% year-on-year on a consolidated basis. Freight costs too saw a marginal increase annually, although they fell sequentially.

After the March quarter, analysts had cautioned that the full impact of increased petroleum coke (petcoke) prices would start reflecting from the first quarter of FY18 onwards. It certainly looks like those fears have come true since the power and fuel cost continues to head northwards. Prices of international petcoke, a key input material, have risen by more than 50% year-on-year. Petcoke comprises nearly 70% of UltraTech Cement’s fuel mix.

Consolidated operating margin expanded to around 23%, aided by higher blended realizations, said analysts.

The results include those of the cement plants of Jaiprakash Associates Ltd and Jaypee Cement Corp. Ltd acquired in terms of a scheme of arrangement, the company said. Apart from movement in petcoke prices, the market would also be closely watching the pace at which the ramp-up of these cement units happens. Since the cement demand scenario remains muted and prices subdued, a slower-than-anticipated ramp-up would weigh on UltraTech Cement’s overall FY18 profitability, cautioned analysts.

Meanwhile, volume growth in the June quarter was flat at around 13.2 million tonnes and below estimates, said an analyst at a domestic broking firm, who asked not to be named. The volume growth figure was not announced at the time of writing. Though largely driven by capacity expansion, peer ACC Ltd reported strong volume growth in the June quarter. This could add to some pressure on the stock.

Year-to-date, the UltraTech Cement stock has rallied more than 30% and is trading at an expensive one-year forward price-to-earnings multiple of 29 times.

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